How We Fall For The Greatest Con Job Of All

None of us likes to feel deceived. Being the victim of a con job makes us feel used, that others have taken advantage of us. Whether it's in love or at work, being conned robs us of trust as well as dignity.

Thus it is particularly surprising that we are so vulnerable to the greatest con job of all: the ways in which we deceive ourselves. Such self-deception robs us of opportunities for self-improvement. In many cases, it literally robs us of money.

When I taught at a medical school in Syracuse, I used a simple example to illustrate the idea of self-enhancement bias. I asked the medical students to rate themselves on a five-point scale, where "1" represented much below the average person in society; "3" represented at the level of the average person; and "5" represented much above the average person on the street. The adjectives that the students rated themselves on included such items as "caring" and "trustworthy". These were items selected to reflect character virtues.

Regardless of the audience, from year to year, over 80% of the participants rated themselves either a "4" or a "5" on those adjective dimensions. Only a handful rated themselves with a "1" or a "2". Quite simply, when it comes to character, we don't like to think of ourselves as average. Most of us think of ourselves as better than others, although logically half of us must reside below any 50% median!

Maria Popova, writing about how our delusions help keep us sane, cites a similar example: seven out of ten people rate their physical attractiveness as above average. She points out that there may have been evolutionary advantages associated with optimism and self-enhancement, as those with high degrees of confidence and self-belief were those most likely to undertake great achievements.

Nor is self-enhancement bias and inaccuracy of self-perception limited to the day trading world. An eye-opening assessment from The Mathematical Investor blog, written by a group of professional mathematicians in quantitative finance, has taken a look at the track record of active money managers in 2015 and also their performance in 2014 and found shockingly dismal results. Quite simply, confident market prophets have fallen distinctly short when it comes to profits. As one nice illustration, the 10 stocks selected for top 2015 performance at the start of the year have collectively lost about 7%, inclusive of dividends, according to the authors.

The list of our self-focused con jobs goes on and on:

How many of us stay in distinctly unsatisfying marriages, rationalizing that "it's not that bad" and that "every marriage has problems"?

How many of us buy into new year's resolutions, only to undo their efforts days or weeks later?

How many of us are disengaged in their work, but stick with the status quo, rationalizing that things will get better, that they'll receive promotions, etc.?

Maria Konnikova, in her forthcoming book The Confidence Game, explains that the essence of being conned is buying into an attractive narrative. As she notes in the New York Times, this narrative gives us belief and hope, but it also makes us susceptible to the manipulations of others. It also makes us vulnerable to the stories we tell ourselves. In many ways those are the greatest con jobs of all, because they they persist over a lifetime.

Across many trading firms, I've made a study of successful money managers. My most surprising finding is that the most consistently successful ones were not at all the most outwardly confident ones. Indeed, they come across more as worriers than warriors. They are self-aware-- highly aware of their limitations--and they look first to how they might be wrong, not right. This helps them manage risk effectively, quickly correct mistakes, readily adapt to change, and stay in the game long enough to build knowledge and skills. Perhaps true confidence comes from the freedom to question narratives, especially our own.